Fuso Dentsu Co., Ltd. (TSE:7505) shares have had a horrible month, losing 48% after a relatively good period beforehand. Longer-term shareholders would now have taken a real hit with the stock declining 5.6% in the last year.
After such a large drop in price, Fuso Dentsu may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.4x, since almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 23x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for Fuso Dentsu as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Fuso Dentsu
Is There Any Growth For Fuso Dentsu?
The only time you'd be truly comfortable seeing a P/E as depressed as Fuso Dentsu's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. The latest three year period has also seen an excellent 529% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is only predicted to deliver 11% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that Fuso Dentsu is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
Shares in Fuso Dentsu have plummeted and its P/E is now low enough to touch the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Fuso Dentsu currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
It is also worth noting that we have found 2 warning signs for Fuso Dentsu (1 is a bit concerning!) that you need to take into consideration.
If these risks are making you reconsider your opinion on Fuso Dentsu, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.